If you file bankruptcy, you may or may not have to pay something back to your creditors. What determines your amount of payback is the bankruptcy chapter you file, the amount of your income and the type of debt you owe. Even if you have to pay some of your creditors back, the total amount may not be that large, depending on your financial situation.
Chapter 13 Reorganization of Debts
Chapter 13 bankruptcy is the chapter that requires you to reorganize your debts and make payments to your creditors. While most debtors file Chapter 7 bankruptcy, which is payment-free, if your income is too high you probably will not qualify for Chapter 7 and will have to file Chapter 13 instead. The term of a Chapter 13 bankruptcy is between three and five years, during which time you make monthly payments to the court. The court, in turn, distributes your payments to your creditors according to a court-confirmed plan.
Calculation of Payback
The amount you have to pay your creditors back in Chapter 13 depends on how much money you have. You can find out exactly how much this is by completing Bankruptcy Form 22C. What this form essentially does is take the amount of money you earn and subtract expenses such as health care, utilities, transportation, food and shelter. What's left over is called your disposable income. In the eyes of the court, this is the amount you can afford to pay to your creditors.
If Form 22C doesn't leave you with much disposable income, your creditors will not receive much by way of payments. However, certain creditors, known as "priority creditors," must always receive full payment. Examples include alimony payments, wages you owe to employees, child support payments and income taxes. You cannot avoid paying your priority creditors by filing Chapter 13 bankruptcy with a low income.
Chapter 7 Bankruptcy
If you qualify, you can file Chapter 7 bankruptcy instead of Chapter 13 and not worry about making any payments at all to creditors. While your property is theoretically subject to seizure in a Chapter 7 bankruptcy, in reality most Chapter 7 debtors file "no-asset" cases. In a no-asset case, state bankruptcy exemptions protect all of your property from confiscation. As a result, your creditors end up with nothing in a no-asset Chapter 7.
John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.